All the news this morning has taken place in Australasia with a central bank hiking rates as part of a lead-off cycle of interest rate increases and, elsewhere, an unemployment figure that has blown expectations out of the water.
The Reserve Bank of New Zealand hiked interest rates yesterday by 25bps as its lead-off hitter in a concerted effort to normalise its monetary policy. Growth has been strong on the base of Chinese demand for dairy exports, strong immigration flows and the rebuilding effort following the Christchurch earthquake three years ago. Inflation expectations are rising in the country and business confidence is too; last month’s number marked a 20 year high. The Bank also raised its growth and inflation expectations in this month’s release predicting GDP will grow by 3.3% in the 12 months to the end of March, 0.6% higher than their thoughts in December. It will be 3.2% for the year to March 2015.
There were some strange pieces within the statement as well however. Reserve Bank of New Zealand Governor Wheeler said he could see up to 125bps of rate increases this year but that this would not have an effect on the currency. NZD/USD rallied over a per cent after the decision to its highest level in 10 months despite protestations from Wheeler that “the bank does not believe the current level of the exchange rate is sustainable in the long run” and that it represents a “headwind” for exporters. It is a strange form of intervention to weaken a currency but deliver rate hikes and an intrinsic increase in the attractiveness of that same currency. Let the pricing in of further rate rises begin!
Mirroring gains across the Tasman sea the AUD is clattering higher this morning following a jobs report that has left Aussie bears scratching their heads. Australia saw the largest increase in payrolls in 22 years in February with 80,500 people gaining full-time employment and overall employment rising by 47,000. Hopefully, this means that the RBA’s decision to cut rates to record lows is finally showing some pass through into the country’s labour market. Subsequently we are scrubbing our thoughts of near-term rate cuts by the Reserve Bank of Australia in the near future although we expect guarded statements on the exchange rate remaining an issue should AUD longs take hold.
Yesterday’s European session was really quite dull in comparison to what has happened overnight. Euro remained bid over the course of the day and we walk into the London office with EURUSD within spitting distance of the 1.40 level. Euro strength has come despite yesterday’s inflation numbers from Spain and Portugal that both showed deflation on a month on month basis by 0.1% and 0.3% respectively. France, Italy and Ireland have their figures today and Germany’s is released on Friday. Poor Eurozone industrial production numbers only slowed the increase of the single currency as well as investors have piled into a haven from emerging market negativity. Figures released yesterday tend to suggest that central bank reserve managers are also increasing their holdings of euro in recent weeks, only helping the rise.
Chinese industrial production and retail sales both missed estimates this morning further enlivening fears that the world’s largest workshop’s change to a consumption based economy is faltering. Retail sales rose by 11.8% in February against a 13.5% expectation while industrial production rose 8.6% against a 9.5% consensus. That 7.5% target is looking all the more difficult.
The main release today is the US retail sales announcement at 12.30 with the market looking for a 0.2% bounce back from a poor January number. Tightening US yields higher would be yet another distraction for FX markets if this figure surprises to the upside. Thoughts on the US have been quiet since January.
